Rating Blues, Vodacom Beats SA Credit
Vodacom has proven to be far more resilient.
Last week (16 October), Standard & Poor’s Ratings Services raised its long-term South Africa national scale Rating on Vodacom Group to zaAA+ from zaAA- and affirmed its short-term Rating at zaA-1.
Beleaguered telecommunications firm Telkom was not so lucky, as Moody’s Investors Service announced a one-notch downgrade to Baa3 from Baa2 at the start of October, reflecting “primarily the weakening of the South African government’s Credit profile”.
By way of rationale, S&P said that it continues to view Vodacom’s business risk profile as “satisfactory” and its financial risk profile as “intermediate”.
“The ratings on Vodacom are supported by the group’s resilient and leading position in the maturing South African mobile telephony market. Rating strengths also include the group’s sustained solid free cash flow generation and moderately leveraged balance sheet,” S&P said.
However, the Rating agency noted that its expectations of increasing competition and adverse regulatory changes over the next few years in South Africa constrained the ratings.
“Additional Credit quality constraints include sizable infrastructure investment requirements and growing exposure to higher-than-average political, operational, and currency risks in the countries in which Vodacom operates outside South Africa,” Standard & Poor’s said.
On Monday (22 October), Vodacom beat analysts’ forecasts in a trading statement for the six months ended September 2012.
Vodacom is expecting its headline earnings per share to be between 20% and 25% higher than 324 cents in the corresponding period last year.
The group said it also expects basic earnings per share (EPS) to be between 30% and 40% higher than 301 cents in 2011.
Shares in Vodacom surged 4.8% to 108.50 on the JSE; however, it gave a portion (2.34%) of that back in trade on Tuesday (23 October) following a market sell-off on a day that saw the All Share Index drop 0.79% to 36,678 points.
Similarly, rival operator MTN, gave up 1.30% to R152.01 on Tuesday with the group expected to publish its quarterly update on Thursday (25 October).
While S&P does not rate rival firm, MTN, Fitch Ratings has recently affirmed MTN Group’s national long-term Rating at AA-(zaf) and national short-term Rating at F1+(zaf). It also provided a ‘stable’ outlook for the group.
Telkom however, remains an uncertain entity. At the start of October, Moody’s said it felt the need to change its assessment of the likelihood of support for Telkom being forthcoming from the South African government in the case of need to “moderate” from “strong”, while still maintaining the “high dependence” assessment.
Much has been written about Telkom’s future in recent months following a block by government of a deal with Korea based telecoms firm KT Corp back in May.
However, very little has been said by government regarding the group’s future, leading to much speculation including talk of nationalisation, and a potential deal between it’s mobile arm, 8ta, and rival operator Cell C.
Telkom is 39.8% owned by the South African government and 10.5% by PIC, while 2% of the company is in treasury shares and the remaining 47.7% is in free float.
According to Moody’s, it reassessment led the Rating agency to remove the previous one-notch ratings uplift from Telkom’s standalone, or baseline Credit assessment (BCA), Rating of baa3, resulting in the one-notch downgrade of the company’s global scale issuer Rating to Baa3.
“Telkom’s national scale long-term issuer Rating remains unchanged at A2.za. The outlook for all of the company’s ratings is stable,” it said.
“Telkom’s BCA of baa3 continues to reflect the company’s position as a leading telecommunications operator, with a leading market position in South Africa’s fixed-line business and a growing presence in broadband and mobile offerings.
“However, the Rating also reflects that Telkom is facing execution challenges to grow its 8ta offering and stabilise its operating margins through (1) its strategies to increase adoption of information communication technology (ICT) among its business customers; (2) customer service improvements; and (3) network upgrades for its improved bundled offerings,” Moddy’s said.
The ratings firm added that the current BCA was also based on Telkom’s low leverage and overall strong Credit metrics for the Rating category. “This offsets to some degree Telkom’s operating and competitive challenges, as well as the larger capital investments it needs to make to deliver on its key strategies for the upcoming years.
“The Rating further assumes that Telkom will not experience any difficulties in terms of liquidity, refinancing or funding and so will be able to meet its financial and operating commitments. To the extent these would arise, further downward pressure would be exerted on the Rating or outlook,” it warned.
Rating Blues, Vodacom Beats SA Credit
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